Expedite Tax Savings and Put Your Money to Work
You have a financial future you’re building, working to make it as abundant as possible, always looking for ways to maximize your money while minimizing your taxes.
Along with one of our favorite financial vehicles — properly structured, maximum-funded Indexed Universal Life (what we call an IUL LASER Fund) — another strategy to consider is real estate.
Real estate gives you an opportunity to own assets that can appreciate, while also saving on taxes with qualifying deductions.
And particularly when you choose short-term rental real estate, you also have the opportunity to earn income while expediting tax savings through accelerated depreciation.
You can then use that income and tax savings to create more wealth by either acquiring more short-term rental properties and putting that money to work in tax-advantaged vehicles like IUL LASER Funds.
Curious? Let’s go a little deeper.
A Closer Look – Short-Term Rental Accelerated Depreciation
When you purchase a piece of real estate for short-term rental, you can accelerate the depreciation of a portion of the real estate by writing off qualifying assets in the first year, rather than spreading it out over time. (Note that you’ll also be able to continue with traditional depreciation on the rest of the property over the coming years.)
To do this right, you’ll want to consult with an expert who can provide an evaluation for your accelerated depreciation schedule. They’ll be looking for things like the cost of the water heater, the furnace, the furniture, etc.
So let’s say you purchase a $400,000 short-term rental property that you rent out on a platform like Airbnb or VRBO. (Note: Be sure to adhere to IRS rules for short-term rentals to qualify for deductions.)
With your accelerated depreciation evaluation, you might be able to create upwards of $100,000 in total depreciation that very first year. If you’re in a 30% marginal tax bracket between federal and state, that could mean you’re saving about $30,000 in taxes.
You can repeat the process by buying another short-term rental property in Year 2, another in Year 3, and so on, for as many years as you want.
While you could do this indefinitely, we often see people acquire additional properties every year for about five years.
With the influx of tax savings and income from your property, you can now put that money to work in a tax-free environment.
Tax-Free Growth With IUL
Going back to our illustration, let’s say you create $30,000 in tax savings with the accelerated depreciation strategy on five properties each year for five years.
You take that money, along with profits from your rental and traditional depreciation over the coming years, and you funnel it all into IUL.
Once it’s inside the IUL, your money can accumulate tax-free, based on index strategies you choose.
With IUL, your money is also protected from downturns in the market with a 0% guaranteed floor, unlike real estate property that’s at risk of losing value due to downturns in the housing market.
And you have quick, no-strings-attached access to your money via tax-free IUL policy loans, whenever you need it. Compare that to real estate, where your only access to income is through rentals and selling the property, which can take time — and incur further taxes.
(As a side note: You can use your IUL to access capital to put toward additional properties. Some people buy the first property, start an IUL at the end of Year 1, then turn around and borrow on that policy to put toward the down payment on the next property in Year 2. They then repeat that process over the coming years.)
Building Your Future With Combined Strategies
If your primary goals were to grow wealth and save on taxes, why only invest in real estate, when you can leverage your real estate investments and put that money to work in IUL?
With our scenario, let’s say you used the accelerated depreciation strategy each year for five years on five properties, and every year you put about $30,000 in tax savings into an IUL LASER Fund. By Year 5 you would have $150,000 in an IUL that can now grow tax-free.
In about 20 years, based on average historical returns, your policy could have as much as $1 million, tax-free. In 30 years, that could be as much as $2.5 million. And that’s all just off tax savings.
Now you might be thinking, “This is a great way to save on taxes, but what about the tax bill that’s still looming in the background, waiting for me to sell the properties and give Uncle Sam another windfall?”
You can choose to get those taxes over and done with by selling the properties after the initial five years and put your after-tax net profits into an IUL to grow tax-free from that point forward (which allows your heirs to inherit your wealth income-tax-free via the death benefit).
Or you can choose to keep the real estate until you pass away and transfer the properties to the next generation. With this approach, they’ll get a step-up in basis, which eliminates the deferred tax. From there, they can decide what to do with the properties: sell and put the net profits into their own IUL LASER Funds, renovate/exchange the properties and use the accelerated depreciation approach, etc.
As you look at your options, you can see why more people are starting to combine short-term rental real estate with IUL strategies.
If you’re interested in exploring strategies like these to grow your Financial Dimension, we’re here to help.
_______________________
Our IUL specialists can help you maximize your wealth while minimizing your taxes. Click here to schedule a call today!
